October 14, 2010

Host: Ted Simons

Foreclosures

Nearly half of the existing homes sold in the Valley last month were foreclosures. That’s a new high for the year. ASU real estate
professor Jay Butler discusses how foreclosures are impacting the area’s housing market.

Ted Simons: Nearly half of the existing homes sold in the valley last month were foreclosures. That's a new high for the year. Joining to us help figure it all out, is Arizona State University Real Estate Professor Jay Butler. Always good to see you. Thanks for joining us.

Jay Butler: Glad to be here.

Ted Simons: What does it all mean?

Jay Butler: It means that the story continues. We thought we would be getting towards the end of the story by now, but it seems to be mounting, and new curves get thrown in all the time. It just -- coupled with the weak economy, things just don't seem to be improving.

Ted Simons: Bottom line, uncertainty in the housing market?

Jay Butler: Very much uncertainty. Because now with the moratoriums and discussions of issues and other things, the one big group that was active in the market were people buying foreclosed homes, they have sort much backed off. Even in some states you can't get title insurance for them. So it's an ongoing issue.

Jay Butler: Basically it's provocatively procedural errors. They didn't sign documents in the presence of a notary public. The person that signed the documents didn't review the documents. The Attorney General Consortium is looking not only at these document, but the entire foreclosure process as to were there problems with legal descriptions, what about people who made payments but they weren't recorded correctly in their mortgage company? So they've broadened the level of investigation over what initially was discussed.

Ted Simons: Do we know how many people have actually lost their homes because of this?

Jay Butler: Well, probably from the standpoint that they lost their homes, they should not have lost their homes, probably very few. Basically these are as bad as it sounds, procedurals. But there's no doubt people were told they might lose their homes when in fact those were errors, and they should not have even been informed of that issue.

Ted Simons: You mentioned moratoriums, those likely to accelerate?

Jay Butler: Right now you have banks doing different things. One bank is doing a total moratorium on foreclosures, and selling foreclosures throughout the United States. Another one is only doing out selling foreclosed properties, but only in the judicial states. Other lenders are saying, we didn't do anything wrong, we're not going anything and we continuing with the process.

Ted Simons: So take this with prior problems with real estate, mortgages, lenders, etc., what does this do to the public perception of the home finance process?

Jay Butler: Well, it convince people what they thought it was a desirable process. That lenders were out for their own good, that there were errors regardless of what they say, there's been stories -- the lawsuits concerning these procedural situations started in 2008. Really it's only what's happened in the last few weeks is the publicity about these lawsuits. You have situations in which MERS, mortgage electronic registration system, which nobody has heard of outside the industry, is big news. One judge wrote probably correctly, favoring MERS, that basically we have modern technology, modern commerce forms, based on law derived from medieval England. So we have a situation while the law has not kept up with the technology and the marketplace.

Ted Simons: Does the law need to keep up in order for the marketplace to avoid even more -- you're talking about uncertainty and now you're talking about these investigations of foreclosures, talk about self-perpetuating, it seems like a death spiral.

Jay Butler: It is. You think you're on your way home, and another curve shows up on you. This really has convinced a lot of people -- investors have been driving the market, there have been areas where owner occupants have been buying foreclosed homes, but it's been the investor. They started backing off a couple months ago. Concerns about oversupplying in some areas of whatever is there, and I think some concerns about can they get title insurance, can they get a clear understanding of what's happening.

Ted Simons: And as all this goes on, median prices, just keep dropping?

Jay Butler: They kept slowing. Really what the problem is median price of what? You have median price of foreclosed homes, which has been going up because people have been foreclosing on a nicer style of home now. Overall median price of homes being sold has been dropping. But in some areas, you're beginning to see stabilization and pickup. You even saw some areas the banks that were selling REO property were selling for more than what they foreclosed on. So they were beginning to make a profit or at least recover all their costs.

Ted Simons: Very quickly, how long before you think all of this, the investigation especially, shakes out and the market starts deciding to move forward again?

Jay Butler: I don't think anybody has a guess on this. I think many of the banks have talked about end of the year, but the repercussions could go on for quite a while.